Wingate Company, a wholesale distributor of electronic equipment, has been exper

Question

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement: Sales $ 1,599,000 Variable expenses 653,780 Contribution margin 945,220 Fixed expenses 1,040,000 Net operating income (loss) $ (94,780) In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division East Central West Sales $ 439,000 $ 610,000 $ 550,000 Variable expenses as a percentage of sales 62 % 31 % 35 % Traceable fixed expenses $ 257,000 $ 328,000 $ 203,000 Required: 1. Prepare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $20,000 based on the belief that it would increase that division's sales by 12%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented? 2-b. Would you recommend the increased advertising?

Explanation / Answer

SEGMENT-WISE INCOME STATEMENT East Central West Total AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 439,000 610,000 550,000 1,599,000 Less: Variable Cost 272,180 189,100 192,500 653,780 Contribution Margin 166,820 420,900 357,500 945,220 Less: Traceable Fixed cost 257,000 328,000 203,000 788,000 SEGMENT MARGIN -90,180 92,900 154,500 157,220 Less: Common Fixed expense 252,000 Net Operating Income -94,780 Req b: Nnet Increase in Operating Icnome: Variable cost ratio to sales 35% CM ratio: 65% Additional sales for advertisement 66000 Additional contribution (66000*65%) 42900 Less: Additional Advertisement 20,000 Net increase in income 22900 Hence, the Increased Advertisement is recommended.

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